PARADIGM SHIFT IN AGRICULTURE COMMODITY MARKET A FINANCIAL PERSPECTIVE: EXPERIENCE AND LESSONS LEARNED

Dr. R. Satish Chandra* Dr. B. Sowmya Satish **

ABSTRACT

The negative impact of high food prices on the food security of poor consumers in India is clear. However, one would have expected the impact on producers to be positive and to encourage them to invest more and increase production. This did not happen. Lack of rural infrastructure, limited access to modern inputs and irrigation, poor roads and storage facilities, rudimentary technology, limited knowledge of modern farming techniques and limited access to credit all led to low productivity, limited participation in markets and lack of investment. These constraints need to be overcome to allow a significant supply response, and proper policy interventions are needed to break out of this vicious circle that has trapped small producers in poverty and left many developing countries heavily dependent on imported food and more vulnerable to price hikes. Hence this paper will address the impact of rise in food price and the food crises from the which was already faced by the world and India what we learned and what measure we have taken to cope up this crises.

* Dr. R. Satish Chandra B.Sc., MDP, MBA, MFAMM, PGDEP, PGDFM, Ph. D, MISTE. Professor & HoD, Dept. of Management Studies, Vivekananda Institute of Technology, Visvesvaraya Technological University, Kumbalagodu, BM Road, Bangalore. Ph: 9739007552, 08026423600 e-mail: satish_ch_in@yahoo.com ** Dr. B. Sowmya Satish B.Com, MBA, MFAMM, PGDFM, Ph.D, Post Doctoral Fellow of ICSSR (Indian Council of Social Science Research), New Delhi. MISTE. Professor of Management & HoD, Dept. of Management Studies, Don Bosco Institute of Technology, Visvesvaraya Technological University, Kumbalagodu, BM Road, Bangalore Ph: 9739007554, 08026423600 e-mail: sowmyasbs24@yahoo.com

PARADIGM SHIFT IN AGRICULTURE COMMODITY MARKET A FINANCIAL PERSPECTIVE: EXPERIENCE AND LESSONS LEARNED
Dr. R. Satish Chandra* Dr. B. Sowmya Satish ** Mr. G Srinivasa ***

INTRODUCTION Instability of commodity prices has always been a major concern of the producers, processors, traders as well as the consumers in agriculture -dominated country like India. Farmers direct exposure to price fluctuations, for instance, makes it too risky for many farmers to invest in otherwise profitable activities. There are various ways to cope with this problem. Apart from increasing the stability of the market, various actors in the farm sector can better manage their activities in an environment of unstable prices through commodity exchanges. Commodity exchanges as defined in a narrow sense in the Indian context are centres where futures trade is organized. These exchanges serve a risk-shifting function, and can be used to lock -in futures prices instead of relying on uncertain price developments. Apart from being a vehicle for risk transfer among hedgers and from hedgers to speculators, fu ures markets also play a major role in price discovery. The price risk refers to the probability of adverse movements in prices of commodities, services or assets. Agricultural products, unlike others, have an added risk. Many of them being typically seasonal would attract only lower price during the harvest season. The forward and futures contracts are efficient risk management tools which insulate buyers and sellers from unexpected changes in future price movements. These contracts enable them to lock in the prices of the products well in advance. Moreover, futures prices give necessary indications to producers and consumers about the likely future ready price and demand and supply conditions of the commodity traded. The cash market or ready delivery market on the other hand is a time-tested market system which is used in all forms of business to transfer title of goods. The upturn in international food prices that began in 2006 escalated into a surge of food price inflation around the world, increasing food insecurity, leading to violent protests and even raising fears about international security. Africa was perhaps hardest hit, but the problem was global. Reports of the impact of high food prices on the poor across many developing countries led to calls for international action to reverse the slide towards increased poverty and malnutrition. Food aid agencies such as the World Food Programme (WFP) encountered difficulties in meeting the higher costs of purchasing food for distribution and appealed for additional funds. The FAO food price index1 rose by 7 percent in 2006 and 27 percent in 2007, and that increase persisted and accelerated in the first half of 2008. Since then, prices have fallen steadily but remain above their longer-term trend levels. For 2008, the FAO food price index still averaged 24 percent above 2007 and 57 percent above 2006.

Looking at prices in real terms (deflated by the World Banks Manufactures Unit Value Index [MUV]), the increases are still significant. Real prices have shown a steady long-run downward trend punctuated by typically short-lived price spikes. There is some suggestion of a flattening out since the late 1980s with a gradual recovery beginning in 2000 before the sharp increase in 2006 the average annual growth rate of 1.3 percent for the period 200005 has jumped to 15 percent since 2006. WHAT DIFFERENCE DO EXCHANGE RATES MAKE? A proportion of these price increases can be attributed to the depreciation of the US dollar, in which international prices tend to be denominated. Expressed in other currencies, the increases are less dramatic and within the range of historical variation, but they are still substantial. The relationship between the currency and commodity prices is a complicating factor in assessing agricultural commodity price increases. It also has implications for how different countries are affected by the changes. The extent to which international price increases translated to domestic consumer and producer price increases in different countries depended on their US dollar exchange rate as well as a variety of other factors, such as import tariffs, infrastructure and market structures, that determine the degree of price transmission. Because most commodity prices are commonly expressed in US dollars, depreciation in the value of the US dollar reduces the cost of commodities for countries whose currencies are stronger than the US dollar, resulting in a cushioning of food price increases to a greater or lesser extent. However, for countries whose local currencies are pegged to or are weaker than the US dollar, depreciation in the US dollar increases the cost of procuring food. More than 30 developing countries peg their currency to the US dollar. DID THE PRICES OF ALL AGRICULTURAL COMMODITIES INCREASE IN THE SAME WAY? While almost all agricultural product prices increased at least in nominal terms, the rate of increase varied significantly from one commodity to another. In particular, international prices of basic foods, such as cereals, oilseeds and dairy products, increased far more dramatically than the prices of tropical products, such as coffee and cocoa, and raw materials, such as cotton or rubber. Therefore, developing countries dependent on exports of these latter products found that while their export earnings might have been increasing this was at a slower rate than the cost of their food imports. As many developing countries are net food importers, this imposed a serious balance of payments problem. WHAT WAS DIFFERENT ABOUT THE 200708 FOOD PRICE INCREASES? The leap in food prices was in sharp contrast to the secular downward trend and the prolonged slump in commodity prices from 1995 to 2002, which even prompted calls for the revival of international commodity agreements. For some analysts, the increases signaled the end of the long-term decline in real agricultural commodity prices, with The Economist (2007) announcing the end of cheap food. Others saw the beginnings of a potential world food crisis. It is an interesting question whether these sharp increases are fundamentally different from earlier price

spikes and whether the long-term decline in real prices could have come to a halt, signalling a fundamental change in agricultural commodity market behaviour. High-price events, like lowprice events, are not rare occurrences in agricultural markets, although high prices often tend to be short-lived compared with low prices, which persist for longer periods. What has distinguished this episode was the concurrence of the hike in world prices of not just a few but of nearly all major food and feed commodities and the possibility that the prices may remain high after the effects of short-term shocks dissipate. The price boom was also accompanied by much higher price volatility2 than in the past, especially in the cereals and oilseeds sectors, highlighting the greater uncertainty in the markets. In the first four months of 2008, volatility in wheat and rice prices approached record highs (volatility in wheat prices was twice the level of the previous year while rice price volatility was five times higher). The increase in volatility was not confined to cereals vegetable oils, livestock products and sugar all witnessed much larger price swings than in the recent past. High volatility means uncertainty, which complicates decision-making for buyers and sellers. Greater uncertainty limits opportunities for producers to access credit markets and tends to result in the adoption of low-risk production technologies at the expense of innovation and entrepreneurship. In addition, the wider and more unpredictable the price changes in a commodity are, the greater is the possibility of realizing large gains by speculating on future price movements of that commodity. Thus, volatility can attract significant speculative activity, which in turn can initiate a vicious cycle of destabilizing cash prices. At the national level, many developing countries are still highly dependent on primary commodities, either in their exports or imports. While sharp price spikes can be a temporary boon to an exporters economy, they can also heighten the cost of importing foodstuffs and agricultural inputs. At the same time, large fluctuations in prices can have a destabilizing effect on real exchange rates of countries, putting a severe strain on their economy and hampering their efforts to reduce poverty. HOW DOES THE 200708 HIGH-PRICE EPISODES COMPARE WITH PAST CRISES? A look at past price behaviour can indicate how different the recent high food price episode was. As can be seen from the graphs (see page 9), one price peak in particular stands out the socalled world food crisis of the 1970s. There are some similarities with that situation. Weather and crude oil price shocks resulted in contractions in food production in the wake of rising food demand brought about by rapid population growth in developing countries. Even export restrictions featured, in the same vein as this time, as measures to contain domestic inflation. However, one big difference is that while the 1970s crisis was caused by supply side shocks, demand factors (notably biofuel demand) were key to the 200708 episode and may have longerlasting effects At the peak of the 1970s crisis, international quotations of rice and wheat rose to US$542 and US$180 per tonne, respectively. It would be tempting to conclude that, as prices in early 2008 far exceeded those witnessed in the 1970s, the world was facing a similar crisis. However, the purchasing power of the US dollar today is fundamentally different from what it was in the 1970s. Looking at prices in real terms, a drastically different picture is revealed. At 2000 prices and exchange rates, for example, the cost of one tonne of rice in 1974 stood at well over four times the average over the first four months of 2008.

THE END OF CHEAP FOOD? Soaring food prices came as a shock partly because consumers throughout the world had become accustomed to the notion of so-called cheap food. Up until 2006, the real cost of the global food basket had fallen by almost one-half in the previous 30 years, with prices of many foodstuffs falling on average by 23 percent per year in real terms. Technological advances greatly reduced the cost of producing foodstuffs and this, together with widespread subsidies in countries of the Organisation for Economic Co-operation and Development (OECD) that rendered more efficient and cheaper production elsewhere unprofitable, entrenched the role of a few countries in supplying the world with food. This supply-driven agricultural paradigm sent real prices spiralling downward on a trend lasting for decades. Added to this, changes in the market and policy setting have been instrumental in reducing stock levels and have led to far more planned dependence on imports to meet food needs. Put together, these developments have resulted in a significant role for major exporting countries to supply international markets as needed. Therefore, it is not surprising that when production shortages occur in such countries, particularly in consecutive years, global supplies are stretched and the ensuing market tightness is manifest in both higher prices and higher volatility. This was precisely the case in the run-up to the recent price surge. Against this backdrop, the worlds growing demand for agricultural commodities, driven by rising global incomes and population and then expansion in biofuel production, left major exporters with little opportunity to replenish stocks. Extreme price volatility for several commodities was another factor prompting fears of a widescale crisis. In a period of rising and protracted price volatility, it is quite difficult to distinguish between market instability and fundamentally higher price levels. Again, uncertainty as to just what was happening on international food markets added to fears of an impending crisis. Does the recent high-price episode reflect a reversal in the trend of falling real prices or is it the case that the world was experiencing yet another spike, albeit a rather large one? Periods of excessive market turbulence do not necessarily result in a fundamental, permanent shift in the trajectory of prices. When they do so, economists describe the event as a structural break. Econometric techniques can be used to detect these structural breaks in agricultural commodity prices. Applying these techniques, even the price peaks for many foodstuffs in the crisis of the 1970s did not manifest themselves as structural breaks. After the worst of the crisis passed, prices simply resumed their preceding trend. It is difficult to draw any firm conclusions regarding the recent price spike from the evidence to date, and econometric tests have so far failed to detect a structural break. Therefore, in order to answer the question as to whether the recent high-price episode is consistent with past commodity price behaviour of sharp but short-lived peaks and prolonged slumps or represents a break with past behaviour patterns, it is necessary to explore the nature of the apparent causes. Many different factors have been cited as responsible: production shortfalls, low stock levels, oil prices, biofuel demand, growing incomes in emerging economies, depreciation of the US dollar and speculation. While it is difficult to determine their individual contributions quantitatively, some of these factors could have a persistent effect on the average level of prices. There are

some features of the current situation, notably the historically low stock levels for cereals and strong demand for biofuels, that suggest that, in spite of the downward adjustments from the peak of early 2008, the recent high prices may well not be short-lived but could persist for some years. AFTER THE RISE, THE FALL FOOD PRICES NOW Prices for most agricultural commodities have fallen significantly from the peaks reached in the first half of 2008. World grain prices have fallen by 50 percent and prices for other basic foods have followed. However, prices remain high by historical standards and are still above their 2007 levels. At the national level in many countries, but especially in Africa, prices remain substantially above 2007 levels. In some cases, the peaks in international prices reached in the first half of 2008 are still working their way through national markets. WHY DID FOOD PRICES INCREASE SO MUCH? Analysts and commentators have emphasized different explanations for the leap in food prices. The most popular is increased demand for certain agricultural products as feed stocks for biofuel production, particularly maize for ethanol. Record oil prices and environmental concerns strengthened interest in alternative energy sources and policy measures in the United States of America, and the European Union (EU) encouraged the expansion of biofuel production. High oil prices also had a direct impact on the costs of agricultural production and prices. A third popular explanation is rapid economic growth in certain emerging economies, notably China and India, increasing demand for food, especially for livestock products, which generated increased cereal and oilseed demand for feed. These explanations focus on new drivers in international agricultural commodity markets and suggest the possibility of a fundamental change in the behaviour of agricultural commodity prices and continuing high prices. Traditional explanations (see box on page 16) of high prices are also relevant supply reductions as a result of drought in major exporters and the lowest cereal stock levels for more than 30 years. Various other complicating factors have also been cited as at least partial explanations of the high food prices. These include an inflow of speculative funds into agricultural commodity futures markets as the global financial downturn weakened more usual bond and equity markets. Once world prices began to rise significantly, the market and policy responses this provoked added to the inflationary pressure, e.g. hoarding against expectations of further price rises, and export restrictions. In practice, all these factors contributed to pushing up food prices. It was the combination of them that was crucial. These were the immediate triggers of increasing food prices but were set against the background of the longer-term problems facing developing country agriculture slowing growth in yields, lack of investment, declining share of agriculture in development aid, and declining funds for research and development which not only exacerbated the food insecurity problem but also made it even more difficult for developing countries to deal with.

PRODUCTION SHORTFALLS AND LOW STOCKS Traditional explanations for food price variability emphasize the importance of exogenous shocks to agricultural supply, notably as a result of the weather. A critical initial trigger for the recent price hikes was the decline in the production of cereals in major exporting countries beginning in 2005 and continuing in 2006. Cereal production declined by 4 and 7 percent, respectively, in those two years. However, there was a significant increase in cereal output in 2007, especially in maize in the United States of America, responding to the higher prices. The quick supply response for cereals in 2007 came at the expense of reducing productive resources allocated to oilseeds, especially soybeans, resulting in a decline in oilseed production. Stocks play a key role in equilibrating markets and smoothing price variations. If stocks are low relative to use, markets are less able to cope with supply and demand shocks and supply shortfalls or demand increases will lead to bigger price increases. This ratio fell sharply from 2006 onwards, reaching a historic low in 2008. The level of stocks, mainly of cereals, has been falling since the mid-1990s. Indeed, since the previous high-price event in 1995, global stock levels have on average declined by 3.4 percent per year. There have been a number of changes in the policy environment since the Uruguay Round Agreements that have been instrumental in reducing stock levels in major exporting countries: the size of reserves held by public institutions; the high cost of storing perishable products; the development of other less costly instruments of risk management; increases in the number of countries able to export; and improvements in information and transportation technologies. When production shortages occur in consecutive years in major exporting countries under such circumstances, international markets tend to become tighter and price volatility and the magnitude of price changes become magnified when unexpected events occur. Indeed, there is a statistically significant negative relationship between marketing season beginning stocks (expressed as a percentage of expected utilization in the ensuing season) and the cereal prices formed during the same season. This means that tight markets at the global level at the beginning of the marketing season tend to put upward pressure on prices. This was one of the main reasons why international cereal prices spiked so sharply in 2006. Continuing low stock levels is one reason why relatively high prices could be expected to persist for some time. By the close of the seasons ending in 2008, world cereal stocks had increased by only 1.5 percent from their already reduced level at the start of the season and reached their lowest levels in 25 years. In 2007/08, the stock-to-use ratio for world cereals stood at 19.6 percent, well below the five-year average of 24 percent and even smaller than the previous low of 20 percent in 2006/07. The stock situation for oils/fats and meals/cakes began to deteriorate in mid-2007 after the spillover effects from developments in the cereals markets, especially of wheat and coarse grains, with the stock-to-use ratio falling from 13 to 11 percent for oils/fats and from 17 to 11 percent for meals/cakes by the end of the 2007/08 season.

WHAT IS THE ROLE OF SPECULATION? Recent discussions of high food prices have included a growing interest in the possible effects of speculators and institutional investors non-commercial traders buying into agricultural commodities on futures markets as returns on other assets have become less attractive. There has been some concern that speculation has contributed to increasing food prices. The downturn in the global properties and securities markets resulted in an inflow of funds into agricultural commodity futures markets looking for profits, both from traditional institutions such as hedge funds and pension funds and from newer commodity-linked and exchange-traded funds. Global trading activity in futures and options combined has more than doubled in the last five years. In the first nine months of 2007, this activity grew by 30 percent over the previous year. Notably, the share of non-commercial traders taking long positions in the commodity markets has been rising, indicating increased interest on their part in buying futures contracts. Between 2005 and 2008, non-commercial traders almost doubled their share of open interests in the maize, wheat and soybean futures markets although their share in the sugar futures market remained largely unchanged. Investments by institutional investors can be large. However, the volume of these investments in agricultural commodities has not been as significant as in other commodities such as metals. The increase in the shares of noncommercial traders in maize, wheat and soybean markets coincided with the increase in prices of these commodities in the physical markets. This high level of speculative activity in agricultural commodity markets in the last few years has led some analysts to connect the increases in food prices with increased speculation. However, it is not clear whether speculation on agricultural commodities was driving prices higher or was attracted by prices that were increasing anyway. A recent study by the International Monetary Fund (IMF) concluded that in general it was the high prices that were encouraging inflows of investment funds into futures markets for agricultural commodities. This question of causality requires further research. Large inflows of funds could provide a further explanation at least for the persistence of high food prices and their apparently increased volatility. Again, further research is needed. In the meantime, the role, if any, of financial investors in influencing food prices is a matter of concern to the extent that some countries have even considered additional regulation. NO SINGLE EXPLANATION FOR SOARING FOOD PRICES The sharp jump in the US dollar prices of food, which peaked in the first half of 2008, can be characterized as the most significant spike since the 1970s. The reason for this development was supply and demand imbalances in many of the major commodity markets, notably cereals and oilseeds. It is primarily on the demand side that plausible explanations for the food price hike can be found. The principal drivers of increasing prices on the supply side tend to be short-lived and are related to production shortfalls and to policy measures such as restrictive export policies by major traders. On the demand side, factors contributing to the recent rise in world food prices are few. Unlike with supply, changes on the demand side are in general neither rapid nor unexpected. This is because, aside from the emerging biofuel factor, the main drivers of demand in food markets are population and income growth. In most cases, these two fundamental variables manifest a gradual (and expected) upward demand progression and, in this way, allow

for supply to adjust. The situation during the recent high-price period does not depart from this trend in that neither food nor feed demand exhibited any sudden or unexpected increase that would have merited the kind of price rises witnessed by markets. Speculation and inflows of investment funds are more likely to have followed the increasing prices than to have caused them. Only the rapid expansion in demand for biofuel feed stocks marks a major departure from past experience. However, biofuel demand alone cannot explain the extent of the price increases in 2007 and early 2008. Record oil prices have increased interest in biofuel development but have also had a major impact in their own right by driving up production and transport costs. Upward pressure on prices has been reinforced also from the demand side by fears that prices might go even higher and by increased demand for stocks. The sharp increase in food prices on world markets cannot be attributed to any one single factor. Each one of those causes commonly cited cannot of itself explain the pattern and extent of recent price movements. It is their coincidence and combination that accounts for the dramatic changes. While disentangling their separate effects is problematic, the evidence does point to biofuel demand and oil prices as the principal drivers. Some broad indication of the relative impacts on food prices of the various factors can be gleaned from simulations with the OECDFAO Aglink-Cosimo model of world agricultural markets. This model is used to generate market projections over the medium term on the basis of assumptions concerning the future values of key variables affecting markets and prices. Varying these assumptions and comparing the resulting projections gives an indication of the strength of each influence. The five key assumptions examined were: (i) biofuel use of grains and oilseeds; (ii) petroleum prices; (iii) income growth in major developing economies: Brazil, China, India, Indonesia and South Africa (EE5); (iv) the exchange rate of the US dollar relative to the currencies of all other countries; and (v) crop yields. For coarse grains and vegetable oil, the price outlook would be most affected if biofuel production were to remain constant at 2007 levels. Changes in demand for these commodities as feed stocks for biofuel production are a source of uncertainty irrespective of whether the cause is an oil price change, a change in biofuel support policies or a new technological development that leads processors to buy different feed stocks. Holding biofuel production constant at its 2007 level results in a 12-percent decline in the 2017 projected prices for coarse grains and around 15 percent in the projected price of vegetable oil. The second scenario shows that wheat, coarse grains and vegetable oil price projections are all highly sensitive to petroleum-price assumptions and would be a further 810 percent lower if oil prices fell to their 2007 level. The reduced gross domestic product (GDP) growth scenario produces wheat and coarse grains prices that are only modestly (12 percent) below the baseline. For vegetable oils, reflecting presumably a much higher income elasticity of the demand and a greater influence of the five countries in world trade, the simulated price difference exceeds 10 percent. A fourth scenario simulating a stronger US dollar raises prices in domestic currency terms in exporting countries, providing greater incentives to increase supplies. At the same time, a stronger US dollar reduces the import demand in importing countries. The combination of greater export supply and weaker import demand puts additional downward pressure on world prices. By 2017, wheat, coarse grain and vegetable oil prices would all be some 5 percent below the corresponding baseline projection.

The scenario under which cereals and oilseeds yields are assumed to be 5 percent higher leads to projected wheat and maize prices for 2017 that are 6 and 8 percent lower, respectively, than the corresponding baseline value, but make little difference to projected vegetable oil prices. WHY HAVE PRICES FALLEN? The sharp fall in international food prices since July 2008 has reversed their equally sharp rise up to that point and pushed them back towards their 2007 levels. The underlying causes of the reversal are a mixture of supply and demand factors. High prices have encouraged an expansion in global production of cereals. However, this supply response has been concentrated mostly in the developed countries and, among developing countries, Brazil, China and India. With the exception of these three, cereal production actually fell between 2007 and 2008 in developing countries. Therefore, it is clear that high food prices were not an opportunity seized by the majority of poor farmers in developing countries their supply response was limited in 2007 and virtually zero in 2008. Falling food prices have little to do with increasing global supplies. The explanation lies more in terms of slowing demand as the financial crisis and emerging global recession have reduced economic activity and oil prices have tumbled. The declining demand has been having most impact, at least initially, on the markets and prices of agricultural raw materials such as rubber, but food prices are also being affected. While falling food prices are good news for consumers, they should not be taken as implying that the global food systems problems are solved. Most of the critical factors that underlay the highprice episode and the resulting threat to food security remain. Developing country food production has not seen any significant increase and weaker price incentives will not encourage further expansion of production elsewhere. Global cereal stocks are still low with the stock-touse ratios for cereals in 2008/09 below their five-year average. Although oil prices have fallen drastically, biofuel demand remains strong as feedstock prices have fallen and new ethanol production capacity comes on line. The impact of falling oil prices on agricultural prices is complicated. Lower oil prices reduce energy and fertilizer costs but will compound the downward pressure on prices of those commodities usable as feedstocks as biofuel becomes less competitive. The net effect will depend on the relative price movements between oil and feed stocks, notably maize. THE IMPACTS OF HIGH FOOD PRICES The impact of high food prices is obviously most severe for the poor who rely on purchased food. For the poor in developing countries, food can account for at least 50 percent and up to 70 80 percent of their budget. Thus, higher prices affect not only their food consumption in terms of quantity and quality, but also their spending in general. The most visible indicator of this negative impact was t he social unrest and rioting that erupted around the world triggered by soaring food prices. The disturbances were mostly concentrated in urban areas. These are the areas where dependence on imported food and exposure to international food prices is probably highest and consumers feel the brunt of the impact of soaring food prices. However, the rural poor are also affected even though their connections to international food markets might be weaker. The impact of higher food prices on the poor depends crucially on whether they are net food sellers, in which case the impact could in principle be positive or net food buyers, in which

case the impact is unequivocally negative. The evidence suggests that most households in the developing world and especially the poor are net buyers of food, and this holds even for rural households that are mostly engaged in agriculture. Whether urban or rural, it is the poorest of the poor who spend the largest share of their income on food and who have no access to assets such as land who suffer most. Female-headed households figure disproportionately on both counts, so the negative impacts of high food prices also have a gender dimension that needs to be addressed in policy responses. Faced with sharply rising food prices, poor households had to adjust their food consumption patterns. Households are reported to have reduced their food intake or to have attempted to maintain it by reducing their spending on more expensive foods and other non-food items. Among the poorest population groups, per capita cereal consumption may even rise in spite of increasing prices as consumers shift to a cereals-based diet away from more expensive and higher-quality food groups, including meat, dairy products and vegetables. In spite of the soaring prices in global commodity markets (in particular of tradable staples such as wheat, rice and maize), the most recent data on the food use of these key commodities illustrate the resilience of per capita consumption. This trend is the same for most low income countries, including those with high levels of undernourishment. However, there are also instances of consumers returning to more traditional foods as the costs of preferred but imported cereals increased. RISING FOOD PRICES FUEL INFLATION Rising food prices contribute to the overall rate of inflation in most countries, including developed countries. Changes in food prices are an important component of the general rate of inflation, as measured by the consumer price index (CPI). This is a weighted average of the changes in the prices of a representative fixed basket of goods, including food, and with the weights reflecting the importance of each good in the typical household budget. The greater the share of food in the household budget, the more rising food prices fuel general inflation. For most developed countries, food expenditure shares range between 10 and 20 percent. In developing countries, the share of food expenditure in household budgets is much higher, absorbing more than half of family income in countries such as Bangladesh, Haiti, Kenya and Malawi. In addition to imposing a heavy burden on the cost of living, rising food prices can have further indirect effects on inflation if they prompt pay increases higher wage demands have been at the core of several protests. An inflation targeting central bank might have to curb inflationary pressure from higher food prices when the effect on non-food prices is significant, and this would mean raising interest rates. This has become a growing tendency in developing countries, but higher interest rates would undermine the much-needed investment in sectors that provide a path out of poverty for vulnerable countries, especially the agriculture sector. HIGHER FOOD PRICES MEAN HIGHER FOOD IMPORT BILLS In spite of the recent falls in international food prices, the global cost of imported basic foodstuffs in 2008 is forecast to reach more than US$1 trillion, nearly 25 percent higher than in

2007, driven by substantially increased prices of rice, wheat, coarse grains and vegetable oils and compounded by increased freight costs, which nearly doubled for many routes. Many of the poorest countries are food importers, heavily dependent on cereal imports. Higher food prices on world markets mean higher food import bills and a balance of payments problem. The total cost of food imports for developing countries was already 33 percent higher in 2007 than in 2006, and annual food import bills for low income food-deficit countries (LIFDCs) are now more than double their 2000 level. At the national level, the impact of high commodity prices depends, among other things, on whether a country is an importer or an exporter, what it imports or exports, its trade policy and its exchange rate policy. LIFDCs dependent on increasingly costly cereal imports (in some cases for up to 80 percent of dietary energy supplies) and on exports of tropical products or agricultural raw materials, for which prices have increased less, and with currencies linked to or depreciating against the US dollar are the most vulnerable. The situation of countries that in addition are food insecure (in the sense of more than 30 percent of the population being undernourished) and net fuel importers is obviously extremely precarious. There are more than 20 developing countries with these characteristics, at least 16 of them in Africa. It is apparent that the most vulnerable countries bore the highest burden of the increasing cost of imported food, with total expenditures by LIFDCs some 35 percent higher in 2008 than in 2007 the largest annual increase on record. Compared with other developing countries, LIFDCs already tend to have significantly greater current account deficits as a percentage of their GDPs, spend a much greater share of the value of their merchandise exports to import food and have lower income per head. The majority of LIFDCs have witnessed a decline in the value of their currencies against the US dollar, which has further increased the cost of their food imports. These countries find themselves under economic pressure from all sides.

In addition, the financial crisis could have serious implications for food security in many developing countries. The tight credit situation may restrict access by poor countries to finance, thus limiting their ability to import food. LIFDCs in particular can have difficulty financing their cereal import needs through debt and may face increased fiscal pressure. CONSUMERS LOSE BUT DO PRODUCERS GAIN? Clearly, the impact of high food prices on consumers is unequivocally negative. However, in principle, high prices should have been good news for farmers around the world. Higher food prices stand to improve the incentives for those producing the particular products concerned. In principle, higher food prices increase the funds available to producers for investment, leading to increased agricultural growth and poverty reduction. In this sense, higher food prices might be considered an opportunity at least for windfall gains for some. Access to means of production and assets such as land is a critical factor in determining who reaps the benefits of higher food prices. Large landholders will benefit most. Households highly specialized in agriculture are also likely winners, although these constitute a rather small proportion of the population, relative to the rest. However, will producers respond by increasing supply? It appears that the high food

prices have not been an opportunity for most developing country farmers and a supply response has not materialized. As noted above, in spite of enormous increases in prices, developing countries increased their cereal production by less than one percent in 2008 and production actually decreased in the vast majority of them. The hoped-for supply response simply failed to materialize. Understanding the reasons for this and, hence, what needs to be done to promote supply response are crucial strategic and policy issues. CONCLUSION In the first half of 2011, the India is facing the highest food price levels in 30 years and a food insecurity crisis. Food prices were up as much as 40 percent from their 2007 level and 76 percent from 2006 in the world. The sharpness of the price increases and their persistence, which left not only India but many developing countries struggling to cope with the consequences, make this episode different from past events of food price increases. The latest food inflation is on double digit which is to cope by the Indian Government too. Social and political stability was challenged as rising food prices and falling purchasing power sparked riots and civil disturbance. One should imagine the impact on the poor in developing countries like India who were already spending, in some cases, up to 80 percent of their meager incomes on food. FAO estimates that soaring food prices pushed another 115 million people into chronic hunger in 2007 and 2008 in the developing countries. Low income food-importing countries are especially vulnerable owing to a high incidence of chronic hunger and poverty. The negative impact of high food prices on the food security of poor consumers in India is clear. However, one would have expected the impact on producers to be positive and to encourage them to invest more and increase production. This did not happen. Lack of rural infrastructure, limited access to modern inputs and irrigation, poor roads and storage facilities, rudimentary technology, limited knowledge of modern farming techniques and limited access to credit all led to low productivity, limited participation in markets and lack of investment. These constraints need to be overcome to allow a significant supply response, and proper policy interventions are needed to break out of this vicious circle that has trapped small producers in poverty and left many developing countries heavily dependent on imported food and more vulnerable to price hikes. Hence this paper will address the impact of rise in food price and the food crises from the which was already faced by the world and India what we learned and what measure we have taken to cope up this crises. BIBLIOGRAPHY Commodity Futures Trading Commission ; Economic purposes of futures trading, Washington, 1997. FAO. 2007. The State of Agricultural Commodity Markets 2006. Rome (also available at www.fao.org/SOF/soco). FAO. 2008a. The State of Food Insecurity in the World 2008. Rome (also available at www.fao.org/SOF/sofi).

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